SMSF Loans

Application process for SMSF loans

Self managed superannuation can now purchase residential investment property with borrowed money, and the process is streamlined. SMSF loans or limited recourse borrowing arrangements as it is also known, require the correct structures and fund establishment process prior to the lending institution approving the SMSF loans. Sec 67A and 67B of the Superannuation Industry (Supervision) Act 1993 received royal assent on the 24th September 2007 to permit self managed super funds to borrow under limited circumstances.

In particular, the following structures and arrangement should be adhered to:

Trust Deed Clause: trustees need to ensure their superannuation trust deed is up to date. More importantly, the trustees must have the power to enter into such an arrangement. If required, the superannuation trust deed may need to be updated first. More importantly, if trustees have the intention of purchasing an investment property with their superannuation savings then a corporate trustee should be considered, when setting up self manged super. 

Fund Investment Strategy: trustees must ensure the investment property is consistent with the investment strategy, taking into consideration issues such as liquidity, time frame, ability to repay the interest expenses on the SMSF loans, and further contributions to the fund, if required. More importantly, the fund’s ability to assume further debts and the members’ attitude towards borrowing with their superannuation savings.

Establishing Custodian Trust: For self managed super funds to borrow to acquire an investment property, the property has to be held by another trust, a holding trust, a trust other than the super fund. This other trust must hold the property, as property custodian for the SMSF till the loan is reduced and extinguished. 

The establishment of the custodian trust, also known as – bare trust – is essential. The bare trust is the “legal owner” of the investment property, and the beneficiary of the bare trust is the trustee of the SMSF, who is the “actual owner” of the investment property. The trustee of the SMSF acquires a beneficial interest in the investment property, which is then held in trust by the bare trust. The trustee of the SMSF is the “actual owner” of the property in question.

Transferring legal ownership: this new structure which carves out an exemption on borrowing by self managed super funds is called “limited recourse borrowing arrangement.” The SMSF loans held by the bare trust are reduced over the lifecycle of the funds by making payment of principal amount from fund income such as rent received and contributions made by members. This can include both concessional and non-concessional contributions. Trustees of the fund are advised to monitor the contribution cap limits introduced each financial year to ensure the fund remains compliant. Where contributions are made throughout the financial year in instalments – as opposed to a single lump sum – trustees may want to consider daily administration of the fund. Any excessive contribution to the fund will be identified by SATO SMSF Administration®, and will be brought to the attention of the trustees for remedial action. As opposed to leaving to end of financial year, and having to address this issue during the course of the annual audit.

It is important to note that once the SMSF loans are repaid in full, the investment property must be transferred from the trustee of the bare trust to the trustee of self managed super fund.

Single acquirable asset: self managed superannuation have a wide selection of choices when considering an investment property. These include townhouses, units, apartments, house and land packages, established properties or going off the plan. When deciding on the investment property in mind, it is important to determine the type of SMSF loans required. As a general guide, self funded super can consider established properties, or if considering going off the plan – properties that are 10/90 contracts. 10/90 contracts are more common in nature as it only requires the purchaser to deposit 10% upon signing an unconditional contract. The balance of 90% is due at settlement. This is different to house and land package loan structures that require a systematic loan draw down at each stage of the construction. For example, 5% initial deposit, 10% for slab stage, another 10% at frame stage and so on, until handover. Such a loan structure is is not considered a single acquirable asset, and as such is not permitted. House and land packages are not too common, not unless the developer and construction company is willing to package up the house & land as a 10/90 contract. 

Non recourse loans: self managed super funds can only enter into non-recourse loans. It is non-recourse in nature if the lending institution has a right (mortgage/security) to recover any amounts owing over the asset – only from the investment property and not over other assets held within the superannuation fund. For example, publicly listed shares or unitized products such as managed funds. From the point of view of the lending institution, this is considered higher risk and is reflected in the higher loan to value ratio (LVR), as compare to a standard home loan or investment loan under personal name. It is not uncommon for some banks to require a 30% deposit contribution towards the investment property, plus stamp duty. That is 10% upon signing an unconditional contract, and a further 20% upon settlement – with the bank lending the balance of 70%.

 

PRIVACY NOTICE AND CONSENT

The Privacy Act 1988 (Cth) (The Privacy Act) regulates the way credit providers use personal information. This section tells you how SATO SMSF Administration® might use the information you have given us, and what other information we may seek. Please read it carefully. If you have any questions, ask for more information.

Our collection of your personal information

The personal information we collect from you is collected primarily for the purpose of considering the application for SMSF loans and finance. We also collect this information for purposes including, but not limited to the following:

  • To obtain a consumer credit report about you;
  • To allow the credit reporting agency to create or maintain a credit information file containing information about you;
  • Marketing products and services provided by SATO SMSF Administration® and its related entities;
  • Developing an understanding of the products and services you may be interested in receiving from us; &
  • Compiling statistical data e.g. credit scoring information.

You understand SATO SMSF Administration® may collect information about you from a business which provides information about the commercial credit worthiness of persons for the purpose of assessing your application. You also understand that SATO SMSF Administration® may obtain a consumer credit report containing information about you from a credit reporting agency for the purpose of assessing your application for credit. If your application is for commercial credit, we may obtain a consumer credit report about you from a credit reporting agency for the purposes of assessing your application or collecting overdue payments relating to commercial credit owed by you.

SATO SMSF Administration disclosure of your personal information

We may disclose your personal information as specified below before, during or after the provision of credit to you.

We may disclose personal information about you in the following circumstances:

  • to a contractor of SATO SMSF Administration® under an outsourcing arrangement but only where the contractor is committed to meeting the same privacy obligations as those binding us;
  • to our related entities;
  • to the motor vehicle dealer who supplies a motor vehicle, accessories or services financed by us;
  • to an insurer in respect of any motor vehicle in which SATO SMSF Administration® has an interest or any consumer credit insurer in respect of credit provided by us;
  • in accordance with any consent given to us or where it is authorized or compelled by law;
  • to another introducer or multiple credit providers for the purpose of obtaining finance on your behalf.

You acknowledge that we may arrange the provision of your credit through a contracting Finance Company at their absolute and unfettered discretion and that in such event we may choose to and may disclose all information provided by you to the said Finance Company.

If you are applying for consumer or commercial credit, we may give a credit reporting agency your personal information before, during or after the provision of credit to you. This information includes:

  • Identity particulars including your full name, any known aliases, your most recent three addresses, date of birth, sex, employer and drivers license number;
  • The fact that you have applied for credit and the amount;
  • The fact that we are a current credit provider to you;
  • Details of payments which are more than 60 days overdue and for which debt collection action has commenced;
  • Advice that payments are no longer overdue in respect of any default which has been listed;
  • Details of cheques drawn by you for over $100 which have been dishonoured more than once;
  • The fact that the finance we provide to you has been paid or discharged; and
  • Information that in our opinion you have committed a serious credit infringement.

Exchange of information between SATO SMSF Administration and credit providers

We may provide or obtain from any credit providers, named in our application form, or named in a credit report issued by a credit reporting agency: information about your credit arrangements, including information about your credit worthiness, credit standing, credit history or credit capacity that credit providers are allowed to exchange under the Privacy Act.

This information may be exchanged for the following purposes:

  • to assess an application by you for credit;
  • to assist you in avoiding defaulting on your credit obligations;
  • for marketing (direct and other kinds) to you;
  • to notify other credit providers of a default by you;
  • for us to assess your credit worthiness.

Obtaining information about a guarantor

If you are a guarantor, you agree that we may obtain from a credit reporting agency a consumer credit report containing information about you for the purpose of assessing whether to accept you as a guarantor for credit applied for by, or provided to, the borrower(s). You agree that this agreement commences from the date of our agreement and continues until the credit covered by the borrower(s) application ceases.

Providing information to a guarantor

You agree that we may give a prospective guarantor or a current guarantor, any information about your credit worthiness, credit standing, credit history, or credit capacity that credit providers are allowed to disclose under the Privacy Act, including a credit report for the purpose of:

  • a prospective guarantor deciding whether to act as a guarantor; or
  • to keep the current guarantor informed about the guarantee.

Providing information to another introducer

If another introducer who prepares or helps you prepare our application form may seek access to, and we may disclose to them for the purpose of assessing your application for credit and SMSF loans management:

  • a report or personal information derived from a report provided to us by a credit reporting agency;
  • information about the outcome of your application for SMS loans;
  • information relating to your account, including details of the transactions on and the status of your account; &
  • information required to answer queries from you or a person authorised by you to make inquiries about your account.

Providing information to relevant entities

We may disclose information about you (including information in your application form and information relating to your account) to a related corporation of SATO SMSF Administration® for marketing (direct and other kinds), planning, product development and research purposes, risk assessment, modelling and loan management purposes.

Obtaining Information from Credit Reporting Agencies

You agree that SATO SMSF Administration® and its contractors are authorized to liaise with a consumer or commercial credit reporting agency and/or another credit provider which may be location within Australia and/or New Zealand. You understand that we may obtain a consumer or commercial credit report with a provider in more than one jurisdiction. In addition to Australian, information may be collected from agencies located in New Zealand.

 

 

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